Netflix Inc (NASDAQ:NFLX) stock looks set to soar post solid Q2 numbers, and the technical set up could be yet another catalyst.
California-based video streaming giant Netflix Inc (NASDAQ:NFLX) stormed past expectations with strong user addition across geographies. The company's top line numbers beat analysts' estimates, while its earnings numbers were in line with the guidance issued. Subscriber numbers are possibly the most important metric for Netflix, and the company's solid performance on that front is likely to be rewarded by the Street. More so, given the company's strong user growth projections for the coming quarter. All in all, Netflix's report card had multiple positives, with just the odd negative. Netflix stock is now up by more than 10% in pre-market trade, and the current technical set up also supports a bullish run, suggesting that an extended rally could be on the cards.
Netflix Earnings - Q2 Highlights
Netflix reported strong revenue growth, with $2.79 billion in revenue for the quarter, representing a 32% Year on Year (YoY) growth. The company's top line performance also beat analysts' estimate of $2.7 billion marginally. Netflix's operating margins not only improved over the same quarter a year ago but also beat the company's guidance of 4.4%, coming in at 4.6%. This was a healthy improvement over the 3.3% operating margin it reported in the comparable quarter last year. Net profits came in at $66 million, precisely meeting the guidance, with Earnings Per Share (EPS) of 15 cents rising from 9 cents in the year ago quarter.
The biggest highlights of the earnings release, though, were Netflix's subscriber numbers. Netflix ended Q2 with 51.9 million domestic (U.S.) subscribers, beating its own guidance of 51.5 million by a healthy margin. Further, the number translated to a 10% YoY growth in U.S. subscribers, with the absolute user addition marking the company's strongest second quarter performance in many years - since 2011, to be precise.
International subscriber numbers were particularly impressive, coming in at 52 million, beating the 50.5 million guidance handsomely. Netflix's international base grew at an impressive pace over the year ago figure of 36.1 million, clocking in 44% growth. Q2 also saw the company's international subscriber base go past its U.S. subscriber count for the first time. Another first for this set of users came from Netflix's guidance, which projected a positive contribution from international services for the full year 2017.
This becomes especially encouraging when combined with the company's user addition guidance for Q3. Netflix expects to add 75,000 subscribers in the U.S. while signing up 3.65 million subscribers outside its domestic market. The implied net subscriber addition of 4.4 million is a big step up from the 3.2 million the company had projected for Q2, albeit smaller than the second quarter's net addition of 5.2 million subscribers. Netflix still expects to meet its 7% full year operating margin target, which is good news, while growth is expected to hover around the 30% YoY level in Q3.
On the down-side, net profits could've swung either way, but just about managed to meet the guidance. Quoting from the earnings report, "Q2 EPS was on target at $0.15, as a greater than expected tax benefit offset a -$64 million non-cash unrealized loss from our euro bond (which was recognized in our P&L in interest and other income/expense)". Further, Netflix's free cash flows continued to be negative in the second quarter. The cash burn this time around amounted to $608 million, up from $423 million in the first quarter and $254 million in the year-ago period. The sharp increase was mostly on account of spends related to original content. Netflix expects this trend to continue in the coming years. That said, positive contribution to profits and strong user addition from the international segment should only help matters.
NFLX Stock Looks Set For An Extended Rally.
As per the latest short interest data, short interest in Netflix stock continued to rise, coming in at 27.2 million shares as of mid July. Short interest represented 7.4% of Netflix's float, with days to cover rising from 4.3 to 6.4 days. What that tells you is that a good amount of short covering is likely to play out today when markets open. What that's likely to do, is to trigger a Golden Cross, with Netflix's 20 day Simple Moving Average (SMA) rising above its 50 day SMA. This is a bullish signal and could fuel the rally further in the coming days. Further, Netflix stock is still some distance away from entering overbought territory, and the Moving Average Convergence Divergence (MACD) has also been trending higher, implying that most signals point to a bullish bias. Expect to see an extended rally in NFLX stock over the coming days. And with the stock poised to touch $180 today, $200 could be well within reach in the coming days.
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